Asset Recycling, a smarter way for Australia?

This is my opinion piece that appeared in the Australian Financial Review today, 18 March 2015.

I welcome your opinions and observations.

The decision to sell poles and wires in NSW is extraordinarily straightforward.

The real questions lie elsewhere. How to unlock the community’s permission to do asset recycling (AR), and what safeguards exist to ensure proceeds of asset sales are spent wisely. These issues are covered in SMART’s discussion paper released today, Asset Recycling, a smarter way for Australia? Available at www.smart.uow.edu.au

An avalanche of independent opinion and analysis shows it is unambiguous that electricity consumers will be better off with more reliable power at a cheaper price under private ownership. The AR model proposed by the NSW Government, and supported by the Commonwealth, involves the sale of public assets and directing the proceeds to meet the unrelenting demand for new infrastructure.

While not new, AR is again a product of its time. There has been a rapid deterioration in the Federation’s fiscal balance, borrowings increased 250 per cent between 2007-08 and 2012-13 in real terms, yet economic growth increased by only 12.9 per cent in real terms over the same period.

AR is intended to work like an accelerant. It enables governments to set a higher trajectory for infrastructure investment, doing more sooner than might otherwise be the case, without recourse to higher taxes or the burden of debt.

If the projects are chosen wisely, the state gets a significant uplift in benefits as new or renovated infrastructure kicks into action, driving new investment and jobs. Deloitte Access Economics, in work undertaken for the NSW State Infrastructure Strategy, has forecast that the strategy will lead to an improvement in GSP of 3.6 per cent by 2035 (above the base case), creating over 122,000 additional full time equivalent jobs.

NSW does not need an expert to tell citizens that it has a shortage of infrastructure, and that building better infrastructure sooner is a priority. Yet, AR is perceived as a controversial act by government.

Funding options other than AR to boost infrastructure investment are limited. Resorting to higher user charges would help in some areas like funding public transport, but IPART has linked this to an improvement in service quality so the process will be slow.

The potential loss of its triple AAA credit ratings and lack of growth in traditional tax revenue, coupled with significant demand for new government services and infrastructure (health, aging, education and transport) has put NSW in a fiscal straight jacket.

Significant expenditure cuts have taken place to drive better efficiency but options to do more are limited. Raising taxes, especially from the narrow state tax base is highly destructive to efficiency, growth and innovation.

So without other clear alternative funding options, AR is an attractive and important avenue for government to pursue.

Previously government’s did not need to do AR on a wide scale. The response to the GFC and the end of the mining boom has changed the landscape for all governments including NSW, especially recourse to more debt no matter how cheap it may appear now.

However, while AR is beneficial it alone is not a panacea for NSW or any of the states towards ensuring a more sustainable long-term footing to fund infrastructure. That involves facing up to better managing demand via direct user charges and stronger infrastructure governance processes.

The Productivity Commission has highlighted that AR must separate the two elements that make it up; the sale of an asset and the decision to invest in infrastructure. The cost benefit analysis must be done separately for each. Linking the two decisions must not reduce the evidence threshold on which those decisions are made.

Community engagement is critical, and rebuilding trust is the oxygen that will sustain an AR program over the longer term. To do this requires a strong governance process, where prioritisation of projects is based on a fixed fiscal envelope linked to the forward estimates process.

Transparency and strong evidence is critical along with an acceptance that infrastructure planning and land use planning is the same thing. While ever land is used inefficiently, governments will be committed to building inefficient infrastructure. This unvirtuous cycle has gone on too long and is in need of reform. INSW has rightly recognised this flaw and is seeking to redress it, but there is much more reform required.

NSW has put in place a sophisticated institutional structure to guide the AR process. Restart NSW and INSW should ensure a high quality investment and administrative oversight.

AR done well has the potential for a smarter infrastructure future for NSW and Australia.